Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gloomy Corporate Earnings Prospects Hold Key to Stock Market Investing

Stock-Markets / Investing 2009 Jan 02, 2009 - 08:16 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: The consensus estimate of earnings for the Standard and Poor's 500 Index for 2009 is currently about $83. The index itself is currently standing at about 904. That means the market is trading on only 10.6 times next year's forecast earnings, far below the historical average multiple.

So it is a screaming buy, right?


Not so fast.

“Consensus” estimates of earnings lag reality substantially. Because they include an average of all earnings forecasts over a considerable period, forecasts made in late September would still be included in today's consensus estimate. But in a period such as the present, when reality has changed substantially since September, the official consensus forecast may differ wildly from what most analysts currently believe. The $83 number is thus a lagging indicator, which doesn't take account of financial sector disasters, sharply slowing output, or tight credit conditions.

Most analysts, finally made more cautious by five successive quarters of declining earnings on the S&P 500 index, currently believe that the S&P 500 will earn about $60 in 2009. What's more, David Rosenberg of Merrill Lynch & Co. Inc. ( MER ), who has been exceptionally bearish for some time with an estimate of $50, has been joined in bearishness by Goldman Sachs Group Inc. ( GS ), which has brought its group estimate down to $53.

That's much more scary. Taking the average S&P 500 multiple at around 14 times earnings, an earnings estimate of $60 would put a “median” estimate of the index at 840; an earnings estimate of $50 would put it at 700. Take a bear market low at 10 times earnings, and you could postulate an S&P 500 low of 600 or even 500.

Still, bear market earnings estimates can be taken only so far, especially those of analysts. After all, on July 7, 2008, a joint report by two top houses predicted that the S&P 500 index would have its best six months since 1982 in the latter half of 2008. That's about as wrong as they could possibly have been!

Still, one should not be surprised by their failure; while one of the two well respected but wrong houses was Deutsche Bank AG ( DB ), the other was – Lehman Brothers Holdings Inc. (OTC: LEHMQ ). Truly, a lot can change in six months.

2009 Bears

Nevertheless, while it's clear that from an earnings viewpoint 2009 should be approached with caution, it is also clear that some sectors and countries will do reasonably well, while others have futures that are truly scary.

Some of the more bearish sectors and regions include:

•  Financial services: The entire industry appears to be scaling down to a fraction of its 2007 size, as many of the innovations of the last 20 years turn out to have been spurious. Investment management also is destined to be much less innovative and less lucrative in the wake of the Bernard Madoff scandal. Eventually, banks and other financial institutions will emerge from the downsizing, but 2009 is much too early to expect that.

• Real estate and construction: Housing won't bottom out until mid-2009 at the earliest, and will recover only very slowly thereafter. Non-residential construction will also be very limited, as offices, stores and hotels will be in glut. There may be some money to be made in road construction from President-elect Obama's infrastructure program, however.

• Emerging markets with no money: The emerging markets that rely on borrowing to fund themselves will be out of luck, as debt will be expensive and hard to come by. Eastern Europe and most of Latin America will be in for a thin time, as their balance of payments and in many cases budget deficits will take years to straighten out.

• Western European countries with high cost bases: The Western European countries with expensive labor and high taxes will find life tough in 2009, particularly if they previously enjoyed a real estate bubble or were big in finance. Germany will probably do fine because its high-skill labor is highly competitive and it had no housing boom; Britain, Spain and Italy will be in a much more difficult situation.

2009 Bulls

Conversely, there will be sectors and countries whose earnings can be expected to hold up well, and whose shares are worth looking at:

•  Gold mines: Inflation is almost certain to return in 2009, because of all the fiscal and monetary stimulus. That has to be bullish for gold , other precious metals, and mining companies.

• U.S. exporters: The rest of the world will show some economic growth, and the U.S. budget and payments deficits and expansionary monetary policy will make U.S. exporters benefit, unless they are involved in businesses that depends heavily on tourism, such as aircraft.

• Healthcare providers: Pharmaceutical companies may have problems with President elect Barack Obama's healthcare plans, because the returns for patented drugs will be reduced, but hospital chains and other healthcare providers will probably benefit from an overall increase in government healthcare spending.

•  Asian countries: In general, Asian countries will do better than the United States and Western Europe, because their cost bases are less overblown and their competitiveness is greater. China and India may have problems, but I like the prospects for Korea, Taiwan and Japan and for companies in those countries involved primarily in their domestic markets. If the Indian election in spring goes to the pro-business BJP party, it will be a buy too; if not, India will have difficulty funding its overblown government sector.

• Brazil: Brazil has a well-balanced economy, less foreign debt than it used to have, and a monetary policy of high real interest rates. It can, therefore, afford to expand domestically through monetary means in a way no other country can.

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in